Pareto‐Improving Redistribution in a Monopoly

Abstract:
This paper discusses the impact of income transfers between consumers of a monopoly. In this context, redistributing the incomes could induce an increase of the demand elasticity which leads to a lower monopoly price, beneficial to any consumer. Under mild assumptions on the demand function, we prove the existence of a transfer maximizing the market coverage which remains advantageous for any contributing consumer. It is proved that the producer is also better off. Then the transfer is Pareto‐improving. In the linear demand case, analytical results are found. Extensions to Cournot oligopoly and natural monopoly pricing are considered. JEL Classification Numbers: D31, D64, H2, L13